A Taut, Last-Minute Stretch to Save an Airline

A dozen or so men walked out of the Hyatt Regency by the Dallas airport last Wednesday night holding in their hands the fate of the world's largest airline.

They were tired and anxious and hoarse, having spent 12 straight hours bargaining at a conference table in the hotel's basement. Over their heads, the silver jets of American Airlines veered toward the runways, doing the work of the very company they were trying to save.

One man, Donald J. Carty, walked from the hotel undoubtedly thinking ahead to his next meeting, this one with American's board of directors. Not only was the future of the airline at stake, but so was his job as the company's chairman and chief executive.

The leaders of American's three unions drove off to catch some sleep before the next morning's conference calls, when they would try to sell a new set of wage and benefit concessions to their boards.

What happened in that hotel, and the paths that diverged from it, ultimately pulled American Airlines back from the brink of bankruptcy while ending Mr. Carty's career at the company after more than two decades. The boards of all three unions agreed by Friday morning to accept $1.62 billion in annual wage and benefit cuts. Mr. Carty resigned at American's board meeting. Gerard J. Arpey, the 44-year-old president and chief operating officer, was promoted to chief executive, while Edward A. Brennan, a director at American and former chairman and chief executive of Sears, Roebuck, became chairman.

In one sense, the recent events that led to the fiery clash between Mr. Carty and union leaders were unexpected because Mr. Carty had tried to improve labor relations during his tenure as chief executive. And just less than two weeks ago, the unions had come around to meeting him on substantial concessions.

But in another sense, the conflict was a consequence of the bursting of the late-1990's economic bubble that has wreaked havoc at many big companies. To avoid bankruptcy, American had to ask workers to take cuts to make up for the excessive growth and wage hikes it encouraged before 2001. Yet, the company continued to dole out what many people perceived as lavish pay to its top executives, then hid some of the benefits during negotiations, aware perhaps of how abhorrent Enron-era corporate behavior had become to average wage-earners.

The outrage first exploded a week and a half ago, when workers learned that Mr. Carty had hid from union leaders new executive benefits while he was negotiating for deep concessions. The benefits -- so-called retention bonuses paid to seven executives and a $41 million pretax payment to a protected executive pension trust fund -- had been approved by American's board last year, but not disclosed until the company made a securities filing late on April 15, just after two unions had already voted to take concessions and a third was finishing its vote.

Infuriated, the Transport Workers Union and the Association of Professional Flight Attendants said they would hold new votes, while the Allied Pilots Association refused to sign off on the concessions.

Mr. Carty retracted the cash bonuses on April 18 and apologized publicly last Monday, although he said the company would keep the $41 million payment in the executive pension trust fund. The unions were still fuming. Without their approval of concessions expected to take effect May 1, the airline -- which lost $1.04 billion in the first quarter -- edged toward bankruptcy.

On Tuesday afternoon, Representative Martin Frost, a Democrat in the Dallas area, got a call from James Little, president of the ground workers' union at American. Could Congressman Frost call a meeting of all the parties and act as a mediator? Mr. Little asked, as Mr. Frost later recalled. American executives ''immediately jumped at the chance,'' he said.

The groups walked into the Hyatt around 9 the next morning. Mr. Frost and three other local members of Congress first met with union leaders for an hour in the Meteor Room in the basement. The union leaders said they were angry that Mr. Carty had put them in an untenable position with their workers by duping them during negotiations.

''I ultimately suggested to them, 'You don't have time for another vote,' '' Mr. Frost said. '' 'You can't take a 30-day vote. The company can't survive with the uncertainty.' ''

The union leaders then left the room. In came Mr. Carty, Mr. Arpey and a couple of other managers. Mr. Carty admitted to the members of Congress that he had made a big mistake, Mr. Frost said, and wanted to find a way to work it out.

All of the parties sat down at the conference table at 11 a.m. and began talking. The union leaders told Mr. Carty he had to give them something they could take back to their members, Mr. Frost said. An hour later, the executives and union leaders told the members of Congress they were ready to negotiate among themselves.

Mr. Frost said that a few of the union officials said they wanted Mr. Carty to step down but none of the unions pushed for that.

''We wouldn't have wasted our negotiating capital on that,'' said Sam Mayer, a member on the board of the pilots' union who had been briefed on the discussions. ''Mr. Carty had mortally wounded himself.''

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Everyone in the room walked out at 9 p.m., having worked out new concession terms. The amounts would remain the same as in the original agreements. But the contracts would last five years instead of six, cash bonus payouts for workers would be tied to those for executives and the unions could change one item in the contracts as long as the change did not alter the value of the concessions.

The union leaders were nervous because they knew it would not be easy convincing incensed board members to vote for the contracts, Mr. Frost said.

Mr. Carty had his own demons to face.

The 12-member board of American met at 8 the next morning in the Wyndham Anatole Hotel in Dallas. The previous night, one director, David Boren, president of the University of Oklahoma, had told Tulsa World newspaper that he intended to ask for Mr. Carty's resignation.

In the morning, the board was split between those who wanted Mr. Carty to step down and those who backed him, said one person briefed on the discussions. The board also debated whether to file for bankruptcy protection immediately. Some members even advocated trying to rehire Robert L. Crandall, the legendary chief executive who left American in 1998 after 13 years at the helm. The previous week, Mr. Crandall had told CNBC that he would return to the airline if asked.

Mr. Crandall's tenure as chief executive had been fraught with labor confrontations, and Mr. Carty had spent years trying to defuse the tension. Despite his efforts, many union officials found Mr. Carty frosty and distant. He declared that he wanted to work with unions to avoid bankruptcy, but showed up only on rare occasions at the bargaining table. His absences provoked an odd nostalgia for the more confrontational Mr. Crandall, who might dress down the union leaders, but at least did it to their faces.

A handful of directors argued that Mr. Carty could weather the storm, the person said. But it became apparent that most of the directors, sensitive to the growing public outcry against American, were thinking of who could replace Mr. Carty.

Supporters of Mr. Crandall -- generally among those who had joined the board before 1998 -- brought up his name. But many directors felt that American had to act fast and had to provide a sense of continuity, the person said. That meant just one candidate: Mr. Arpey, the company's young president.

''Nobody else had more than a 20 percent chance,'' said the person briefed on the deliberations.

Mr. Arpey was almost unknown outside the airline, though he was well-regarded within the company. He was also familiar to the board, which had elected him president a year ago, and whose members had worked with him since 1995, when he was named chief financial officer. Mr. Arpey's acquaintances described him as plain-spoken and able to mix with all manner of employees at the airline, from fellow executives to pilots (he had a license and two planes himself) to ticket agents.

''Gerard is incredibly bright and personable, fanatical about details and a person with a heart that most people never see because he's so private,'' said a former company executive who spoke on the condition of anonymity.

Mr. Crandall once made an infamous boast that American had saved $100,000 a year by cutting olives from on-board drinks -- a measure thought up by Mr. Arpey.

If there was any hesitation among directors about Mr. Arpey's ability to take on the top job, it came from the fact that he had little experience publicly representing the airline, said people briefed on the board's discussions. Mr. Arpey had struggled after being promoted to chief financial officer, when he had to face industry analysts and investors in Wall Street presentations.

But in the end, he was the obvious choice to replace Mr. Carty. The directors left the hotel shortly after 4 p.m.

Mr. Arpey rushed off that night to meet with members from the board of the flight attendants' union. While the other two unions had agreed to concessions, the flight attendants had balked. Some changes in the contract were quickly worked out, one union board member said.

On Friday morning, the flight attendants' board voted 13 to 5 to accept the cuts, allowing American to stave off bankruptcy for now. Mr. Arpey had passed his first test as chief executive.

But the real challenge remained: In an airfield across town sat a fleet of red-and-brown planes. Against all odds, Southwest Airlines had remained profitable for 30 years, and its jets were showing up more and more in the skies. The union leaders and executives at network airlines like American could cajole and threaten and bargain all they wanted, but they were looking more and more like relics of an era now vanishing as quickly as a vapor trail.